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Cost Plus Incentive Fee (CPIF)

Cost Plus Incentive Fee (CPIF). Cost Plus Incentive Fee (CPIF). Provides for an initially negotiated fee to be adjusted later based on relationship of actual costs to target costs. Very similar to FPI except no ceiling price in CPIF

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Cost Plus Incentive Fee (CPIF)

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  1. Cost Plus Incentive Fee (CPIF)

  2. Cost Plus Incentive Fee (CPIF) • Provides for an initially negotiated fee to be adjusted later based on relationship of actual costs to target costs. • Very similar to FPI except no ceiling price in CPIF • Opportunities for increases or decreases in fee intended to motivate the contractor for efficient performance

  3. Cost Plus Incentive Fee (CPIF)Elements • Fee increases when actual cost are less than target cost • Fee is decreased when actual costs are more than target cost • Fee is only decreased to the “minimum” - may be $0 • “Range of Incentive Effectiveness” - the points between minimum and maximum fee • CPIF referred to as a “objective” incentive - fee determined by fact and formula Target Cost Target Fee Minimum Fee - at which fee is “fixed” (floor) Maximum Fee - at which fee is “fixed” (ceiling) Fee Adjustment Formula - Share Ratios

  4. When/Why Use CPIF? • When allocation of risk cannot be determined such that high probability of appropriate profit/fee results • When neither party has reliable knowledge of the exact work required • When SOW’s and Specifications are “open” • “..... As required .....” • “..... Contractors best efforts ....” • “... If necessary ...” • Most often used in Research and Development programs

  5. CPIF Example NegotiatedScenario 1Comment Target Cost $ 10,000,000 $ 8,000,000 $2M under-run Target Fee 1,000,000 1,000,000 Minimum Fee 400,000 Maximum Fee 1,500,000 Share 80 / 20 400,000 20% of $2M under-run adds to target fee Final Fee 1,400,000 Under-run share plus target - is within maximum fee Final Price $9,400,000 Actual Cost ($8M) plus final fee

  6. CPIF Example NegotiatedScenario 2Comment Target Cost $ 10,000,000 $ 11,500,000 Contract over-run by $1.5M Target Fee 1,000,000 1,000,000 Minimum Fee 400,000 Maximum Fee 1,500,000 Share 80 / 20 (300,000) 20% of $1.5M over-run - is decrease to fee Final Fee 700,000 $1M target less $300K share of over-run Final Price $12,200,000 $11.5M cost plus $700K fee

  7. CPIF Example NegotiatedScenario 3Comment Target Cost $ 10,000,000 $ 7,000,000 $3M under-run Target Fee 1,000,000 1,000,000 Minimum Fee 400,000 Maximum Fee 1,500,000 Share 80 / 20 600,000 20% of $3M under-run Final Fee 1,500,000 Max fee cap applies @ $1.5M even though $1M target plus $600K share Final Price $8,500,000

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